the cost of cost-cutting
TRANSCRIPT
The Cost of Cost-cutting
Danie Schoeman
18 October 2012
Shifting Seas
Turbulence, Uncertainty & Volatility Requires Resilient Supply Chains
Building Resilient Supply Chains, EPCA Interactive Supply Chain Workshop, Frankfurt, 14 & 15 May 2012
Faced with volatility … supply chains will need global networks, with variable cost models, asset availability, and speed. Responsiveness and flexibility will be key.” - Koert van Wissen, CEO, InterBulkGroup
The Trouble with the Southern Hemisphere is…
Jean-Paul Rodrigue, Maritime Transportation: Drivers for the Shipping and Port Industries, International Transport Forum, 2010
… we’re a bit away from the current action
Jean-Paul Rodrigue, Maritime Transportation: Drivers for the Shipping and Port Industries, International Transport Forum, 2010 based on LSCI data from UNCTAD (2008, 2009)
The Importance of Logistics andSupply Chain in Trade
• The World Bank Logistics Performance Index Report for 2010 states:– “A competitive network of global logistics is the backbone
of international trade”– “Improving logistics performance has become an
important policy objective in recent years because logistics have a major impact on economic activity”
– “The importance of efficient logistics for trade and growth is now widely acknowledged…..better logistics performance is strongly associated with trade expansion, export diversification, ability to attract foreign direct investment and economic growth”
• These sentiments are echoed in the 2012 report
Connecting to Compete 2010, Trade Logistics in the Global Economy, The Logistics Performance Index and Its Indicators, The World Bank, 2010
Top Five Supply Chain Challenges
55%
70%
60%56%
43%
Cost Containment Supply ChainVisibility
Risk Management Customer Intimacy Globalization
The Smarter Supply Chain of the Future - Insights from the Global Chief Supply Chain Officer Study, IBM, 2010
Cost Containment
The Smarter Supply Chain of the Future - Insights from the Global Chief Supply Chain Officer Study, IBM, 2010
Supply chains can’t keep pace with cost volatility
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Supply chain as a revenue growth driver
Compliance programs and internal controls
Integration and visibility (external)
People development
Business performance measurement
Integration and visibility (internal)
Cost reduction
Continuous business/process improvement
Alignment of supply chain and business strategies
% of Respondents
Schematic Representation of the Fresh Fruit Supply Chain
Packer LandsideTransport
Grower/Producer
ColdStore
PortTerminal
FreightCarrier
RegionalW/houses
Distri-bution
Retailer ConsumerPortTerminal
Exporter Importer Transport
Importer Activities (Demand Side)
Exporter Activities (Supply Side)
South African Case Study
Apple 12,5 kg equivalent to Europe in week 14 (Rand Values)
Value Chain Element Rand Value
Retail Selling Price 175.00
Retail Profit 42.00
Efficiency driven SC Costs 48.94
Other SC Costs 38.57
Gross Farm Income 45.49Europe transport; R 4,25
Importer’s commission; R 8,65
Europe logistics; R 13,00
Europe duties; R -
Freight; R 26,88
Insurance; R 0,75
Exporters commission; R 5,10
Port cost; R 2,26
Wharfage; R 0,42
Transport to port; R 2,13
Finance charges & Interest advances; R 1,00
Levies; R 0,30
PPECB/Inspections; R 0,36
Packing materials; R 11,08
Packing charges (Tipping Cost); R
11,33
Based on data from Malcolm C Dodd, “Transport Logistics and the Fruit Export Value Chain”, Post Harvest Innovation Programme
Europe transport; R 6,50
Importer’s commission; R 7,28
Europe logistics; R 5,85
Europe duties; R -
Freight; R 13,40
Insurance; R 0,75
Exporters commission; R 4,00
Port cost; R 0,50
Wharfage; R 0,16
Transport to port; R 3,90
Finance charges & Interest advances; R 0,50
Levies; R 0,36
PPECB/Inspections; R 0,30
Packing materials; R 8,60
Packing charges (Tipping Cost); R 2,30
Value Chain Element Rand Value
Retail Selling Price 126.75
Retail Profit 29.25
Efficiency driven SC Costs 30.31
Other SC Costs 24.09
Gross Farm Income 43.10
South African Case Study
Grape 4,5 kg equivalent to Europe in week 52 (Rand Values)
Based on data from Malcolm C Dodd, “Transport Logistics and the Fruit Export Value Chain”, Post Harvest Innovation Programme
Europe transport; R 10,59
Importer’s commission; R 5,60
Europe logistics; R 13,00
Europe duties; R -Freight; R 25,93
Insurance; R 0,63 Exporters commission; R 5,36
Port cost; R 5,00
Wharfage; R 0,23
Transport to port; R 1,91
Finance charges & Interest advances; R
0,90
Levies; R 0,32
PPECB/Inspections; R 0,22
Packing materials; R 11,08
Packing charges (Tipping Cost); R 18,06
South African Case Study
Citrus 15 kg equivalent to Europe in week 27 (Rand Values)
Value Chain Element Rand Value
Retail Selling Price 159.25
Retail Profit 42.97
Efficiency driven SC Costs 56.66
Other SC Costs 42.17
Gross Farm Income 17.45
Based on data from Malcolm C Dodd, “Transport Logistics and the Fruit Export Value Chain”, Post Harvest Innovation Programme
South African Case Study –Using Pareto’s 80/20 Principle
Apples Grapes Citrus
Rand Value % of SC Rand Value % of SC Rand Value % of SC
Packing charges (Tipping Cost) 11.33 12.95% 2.30 4.23% 18.06 18.27%
Packing materials 11.08 12.66% 8.60 15.81% 11.08 11.21%
PPECB/Inspections 0.36 0.41% 0.30 0.55% 0.22 0.22%
Levies 0.30 0.34% 0.36 0.66% 0.32 0.32%
Finance charges & Interest advances 1.00 1.14% 0.50 0.92% 0.90 0.91%
Transport to port 2.13 2.43% 3.90 7.17% 1.91 1.93%
Wharfage 0.42 0.48% 0.16 0.29% 0.23 0.23%
Port cost 2.26 2.58% 0.50 0.92% 5.00 5.06%
Exporters commission 5.10 5.83% 4.00 7.35% 5.36 5.42%
Insurance 0.75 0.86% 0.75 1.38% 0.63 0.64%
Freight 26.88 30.72% 13.40 24.63% 25.93 26.24%
Europe duties 0.00 0.00% 0.00 0.00% 0.00 0.00%
Europe logistics 13.00 14.86% 5.85 10.75% 13.00 13.15%
Importer’s commission 8.65 9.88% 7.28 13.38% 5.60 5.67%
Europe transport 4.25 4.86% 6.50 11.95% 10.59 10.72%
Data from Malcolm C Dodd, “Transport Logistics and the Fruit Export Value Chain”, Post Harvest Innovation Programme
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4
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1
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An EEE-xtreme EEE-xample to tackleFreight Cost
Efficiency
Economies of Scale
Environment
Shipping Lines try to gain advantages by
Vessel Specifications: Length: 400m Width: 59m Carrying Capacity: 18,000 TEUDraught: 14.5m Container Rows: 23
Maersk to operate largest Container Vessels ever Built (Triple- E Class)
Consequential Interface Issues
0%
4%
8%
12%
16%
20%
0 1 2 3 4 5 6 7 8 9 10
Typical Distribution Pick up (Out-Gate)
0%
4%
8%
12%
16%
20%
10 9 8 7 6 5 4 3 2 1 0 days
days
shar
e p
er d
aysh
are
per
day
Typical Distribution Delivery (In-Gate)
300
350
400
450
500
550
Day1
Day2
Day3
Day4
Day5
Day6
Day7
Ave
rage
Dai
ly G
ate
Vo
lum
e
2x 10,000++ TEU vessel 3x 8.000 TEU vessel
Average
Peak 460
Peak 517
Avg. 424
Peak 488
Peak 464
Day-to-day volatility increased by 80%
Total peak increased by 11%
Ch
ange
of
call
pat
tern
fro
m
tri-
we
ekl
y 8
,00
0 (
4,0
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ves)
to
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ves)
TE
U v
ess
els
Vessel Size Growth creates new Challenges for Gates
Dr. Ing. Felix Kasiske, HPC Hamburg Port Consulting GmbH, Vessel Developments and Implications on Terminal Operations, ACI's Maximising African Port Capacity Summit 2012
Container terminal dimension 9,000 TEU vessel 18,000 TEU vessel Change
Yard peak 1.2 1.36 +13.3%
Yard slots 14 525 16 340 +12.5%
Quay cranes 5 9 +80%
Yard cranes 17 30 +76.5%
Horizontal transport 27 46 +70.4%
Gate dispatches peak hour 54 82 +51.9%
Fewer Vessels Deliver More Boxes per Call …
• Ceteris paribus consideration highlights of the effects of larger vessels replacing smaller ones
Dr. Ing. Felix Kasiske, HPC Hamburg Port Consulting GmbH, Vessel Developments and Implications on Terminal Operations, ACI's Maximising African Port Capacity Summit 2012
Container terminal dimension 9,000 TEU vessel 18,000 TEU vessel Change
Quay crane utilization 59.5% 33.1% -44.4%
Yard crane utilization 46.1% 36.2% -21.5%
Staff 1 1.47 +46.9%
Operational cost/box 1 1.54 +54.2%
Total cost/box 1 1.50 +50.1%
… resulting in Reduced Efficiencies!
• There is a negative impact on terminals and on the total supply chain
• A Tayloristic approach does not work in supply chains – a more holistic, integrated and systemic approach is required
Dr. Ing. Felix Kasiske, HPC Hamburg Port Consulting GmbH, Vessel Developments and Implications on Terminal Operations, ACI's Maximising African Port Capacity Summit 2012
• “Across the board cuts, without understanding where your company’s real profitability lies, results in average performance at best and leaves your organization wide open to failure at worst. That old saying, “When you do average, you get average” really applies in these volatile times.” - Jim Tompkins
• In Visionary/Strategic firms costs are broken into three categories:
The Riddle of Supply Chain Cost Reduction
Category 1: Capital and operating costs
Traditional ongoing expenditures
Category 2: Talent costs
Expenditures for key resources that are
required to operate the business profitably
Category 3: Strategic costs
Expenditures for strategic profit
improvement initiatives
Jim Tompkins, The Riddle of Supply Chain Cost Reduction: Here's a Hint - Cut, Cut, Cut is Not a Strategy, supplychainbrain, 2009
• When times are difficult you can gain competitive advantage by focusing on:
The Riddle is Solved
• “Now you know the answer to the Supply Chain Cost Reduction riddle. It is not about piecemeal cut, cut, cut, and it never will be. The answer to the riddle is an integrated, holistic approach that increases profitability and puts your company in a stronger competitive position.” - Jim Tompkins
Segregating Category 1, 2 and 3 expenditures
Aggressively and intelligently going after Category 1 cost
reduction
Protecting and pursuing Category 2 and 3
expenditures
Jim Tompkins, The Riddle of Supply Chain Cost Reduction: Here's a Hint - Cut, Cut, Cut is Not a Strategy, supplychainbrain, 2009
Avoid Manic Cost-cutting by Building in More Flexibility
• “When it comes to managing costs, companies with top supply chains — those recognized in AMR Research’s Top Supply Chains for 2008 — take a longer-term view. They are moving more quickly toward agile supply chains that allow rapid response to changing market conditions and variable cost structures that ramp up and down with revenues. Flexibility is their antidote for cost volatility.”
• Leading supply chains actively invest in Category 2 and 3 i.e. key resources (talent) that are required to operate the business profitably and strategic profit improvement initiatives
0% 5% 10% 15% 20% 25% 30% 35% 40%
Others
Top supply chains
22%
37%
Extensive adoption of agile supply chain practices
The Smarter Supply Chain of the Future - Insights from the Global Chief Supply Chain Officer Study, IBM, 2010
Investing in Supply Chain Value Creation (Category 2 and 3)
Next-generation supply chains: Efficient, fast and tailored; Global Supply Chain Survey 2013; PwC; 2012
It is evident from the survey that leaders achieve excellence and competitive advantage by focusing on differentiating capabilities.
Maximum delivery performance
Sup
ply
ch
ain
va
lue
dri
ver
Sustainability
Complexity management
Minimised costs
Minimised risks
Maximum volume flexibility and
responsiveness
Tax optimisation and efficiency
Val
ue
crea
tio
n
Activated value drivers
Path To Supply Chain Value Creation
Next-generation supply chains: Efficient, fast and tailored; Global Supply Chain Survey 2013; PwC; 2012
Investments in Differentiating Practices of Leaders
Supply chain value driver Top three differentiating practices of leaders
Maximum delivery performance
1. Collaboration with key customers on planning (e.g.effective forecasting)
2. End-to-end supply chain planning and visibility3. Vendor-managed-inventory direct-replenishment model
Minimised costs 1. Best-cost country sourcing2. Differentiated order-to-delivery time3. Differentiated service level, including potential reduction
Maximum volume flexibility and responsiveness
1. Internal capacity flexibility 80%-120%2. Flexible shift models/payment structure3. Regional supply chain set-up
Minimised risks 1. Multiplication of sources and sole-sourcing avoidance2. Regular review of suppliers’ financial risk and mitigation
through risk-sharing partnerships3. Visibility and regular monitoring of main suppliers’
operational indicators
Next-generation supply chains: Efficient, fast and tailored; Global Supply Chain Survey 2013; PwC; 2012
Investments in Differentiating Practices of Leaders
Supply chain value driver Top three differentiating practices of leaders
Complexity management 1. Development of multi-skilled employees to cope with complexity
2. Late-stage product customisation3. Use of distributors and other channel partners
Sustainability 1. Agreement with supply chain partners to adhere to highest ethical standards
2. Responsible supply chain partner footprint and procurement framework
3. Internal carbon footprint optimisation and improvement
Tax optimisation and efficiency 1. Manufacturing and assembly optimisation (toll manufacturing)
2. Localisation of inventory ownership in tax-efficient countries
3. Localisation of procurement organisation in tax-efficient countries (e.g., Singapore, Switzerland, Cayman Islands)
A Framework for Supply Chain Collaboration in the Agri-food Industry
Managing Trust
Supply Chain Collaboration
Managing Power
Designing & Governing SC Activities
Establishing & MaintainingSC Relationships
Managing Dependence
Sharing Risks
Selecting Partner(number of
entries)
Selecting Information
& DataSharing
Techniques &TechnologiesCollaboration
Width(SC activities)
CollaborationDepth
(Strategic, tactical,operational)
Sharing Rewards
Adapted from A. Matopoulos, M. Vlachopoulou, V. Manthou, B. Manos, (2007),"A conceptual framework for supply chain collaboration: empirical evidence from the agri-food industry", Supply Chain Management: An International Journal, Vol. 12 Iss: 3 pp. 177 - 186
Sharing of Real Time Information
Retailer’sstore
Retailer’swarehouse
Manufacturer’swarehouse
Manufacturer’sfactory
Rawmaterials
2-3 days 2-3 days1-2 days
1-2 days 1-2 days1-2 days
1-2 days
1-2 daysTotal: 10-18 days
Total: 4-8 days
Demandspikes250%
Traditionalsupply chain
1-2 days 1-2 days 1-2 days 1-2 daysTotal: 4-8 days
Demand-driven supply chain
The flow of information and products across a hypothetical supply chain
Demandspikes250%
Product flowInformation flow
Real time information – no delay in passing information across the supply chain
Adapted from John Budd, Claudio Knizek, and Robert Tevelson, (2012), “The Demand-Driven Supply Chain: Making It Work and Delivering Results”, bcg.perspectives
• Traditional Information Policy = exchange order information only• Full Information Policy = exploit shared information
The Value of Shared Information
• Implement IT to accelerate and smooth the physical flow of goods through a supply chain
Average Maximum
Numerical Study 2.2% 12.1%
Simulation Model 3.4% 13.8%
Percentage SC Cost Reduction of Full Information Policy vs.Traditional Information Policy
Average
Half Lead Times 21%
Half Batch Sizes 22%
Reduction of lead times and batch sizes due tofaster and cheaper order processing
Gérard P. Cachon, Marshall Fisher, (2000) “Supply Chain Inventory Management and the Value of Shared Information”, Management Science, Vol. 46 no. 8, pp. 1032-1048
South African Case Study
Saving due to efficiency driven by Information
policy
Saving due to acceleration and smoothing the physical flow of
goods
R1.07 to R5.92 per carton
R10.27
R0.66 to R3.66 per carton
R6.36
R1.24 to R6.85 per carton
R11.89
FPT Analysis based on data from M.C. Dodd & G.P. Cachon et. al.
Benefits of Investing in Differentiating Supply Chain Practices of Leaders
Gain in earnings per share (EPS) of 50 US cents
5 % increase in return on assets (ROA)
2.5 % gain in profit margin
Next-generation supply chains: Efficient, fast and tailored; Global Supply Chain Survey 2013; PwC; 2012Debra Hofman, Mastering Supply Chain Excellence, AMR Research Executive Spring Conference, June 2004
17 % stronger order fulfilment (with the associated revenue increase)
15 % less inventory
35 % shorter cash-to-cash cycles
Benefits to the Company Benefits to the ShareholdersBased on 10 percent improvement in perfect orders
0
5
10
15
Laggards Average Leaders
4
8
15
Average inventory turns per year
0%
20%
40%
60%
80%
100%
Laggards Average Leaders
79%89% 96%
Average delivery performance (OTIF)
0%
5%
10%
15%
20%
Laggards Average Leaders
7%
12%
16%
Average EBIT margin XXXXXXXXXXXXXX
So What is The Cost of Cost Cutting?
• Achieving average performance at best– A profit of 1.8% to 4% less than the Leaders
• Loss of revenue– With an on time in full (OTIF) measure of 7% to 17% less than the Leaders,
there will be a commensurate lag in revenue
• Loss of profits– A profit of 4.3% to 9% less than the Leaders
• Diminished cash flow– With average inventory days of 21 to 67 days more than the Leaders, cash is
tied up in working capital
• Reduced Earnings per Share (EPS)– An EPS of US$ 0.35 to 0.85 less than the Leaders
• Reduced Return on Assets (ROA)– An ROA of 3.5% to 8.5% less than the Leaders
• Closure of the business– When Category 2 & 3 has been cut to such an extend that the business cannot
recover its profitability at all
Can Transport and Logistics Providers Help?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Year-over-year incremental benefits
Order accuracy
Order fill rate
Logistics fixed asset reduction
Inventory cost reduction
Logistics cost reduction
% of Respondents
2012 Third-Party Logistics Study, The State of Logistics Outsourcing, Results and Findings of the 16th Annual Study
Yes they can! Shipper respondents experience continued measurable benefits from 3PL services.
Shipper Methods of Finding Partners for Horizontal Supply Chain Collaboration
European Supply Chain Horizontal Collaboration Report (2010)
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%50%
Other
With the help of a carrier
Searching for partners with same carriers
With the help of a consultant or orchestrator
Seeking partners with complementary goods
Being approached by potential partners
Searching for partners that can be trusted
Comparing trade flows & delivery information
Searching for partners with similar goals
Searching for partners with same 3PLs
Searching for partners by industry
With the help of a 3PL or 4PL
3PL /4PL service providers play a major role in supply chain collaboration
Conclusion
• In the Southern Hemisphere we are inextricably connected to global supply chains, purely from our location point of view
• Cost containment is one of the top five supply chain challenges, but it is not the same as cost cutting
• A piecemeal cut, cut, cut approach does not work in supply chains – a more integrated, holistic and systemic approach is required which will ultimately increase profitability
• Leaders in supply chain achieve excellence and competitive advantage by focusing on and investing in differentiating supply chain capabilities (Category 2 and 3), such as flexibility which is their antidote for cost volatility
Conclusion
• Investments in differentiating practices of leaders make them more demand driven, resulting in improved revenue and profitability
• The ultimate cost of cost cutting through a piecemeal cut, cut, cut approach, could mean that you cut yourself out of business
• Suitable logistics providers can help in assisting shippers to continued achievement in measurable benefits, especially in order fulfilment, which is the key driver to demand driven success
What Are The Three Things You Hope To Achieve?
“Demosthenes, the greatest of Athenian orators, was asked what the three tests of a great speech were. “Action, action and action‟ was his reply.” James C. Humes